During times of economic troubles, there are typically different opinions as to how best the government should respond. Keynesian
economists argue that government spending should be increased to stimulate economic growth with the intention that such spending
will minimize the degree to which the economy contracts. Others argue that this is precisely the time when government spending
should be reduced even if this leads to further contraction of the economy. The belief is that it will rebound to its full
potential in the long run in a quicker fashion than it would with deficit spending. Which point of view do you believe is more
accurate? How would we know which approach is more successful?
Federal Domestic Policy
Government’s Involvement in the Economy
Governments typically play some role in managing the economy. Since the Great Depression the Federal government has increasing
sought to influence the economy.
• Laissez faire-limited government involvement in the economy
– Economic management and infrastructure
• Macroeconomic conditions and the individual-government policies that affect the economy as a whole and its relationship to
– Economic growth
– Low unemployment
– Price stability
– Positive balance of payments
– Minimizing diseconomies
– Supporting key economic sectors
• Tools of Macroeconomic Policy
– Fiscal policy-Government can increase spending or decrease taxes to stimulate the economy
– Monetary policy (The Federal Reserve Board )-through control of the money supply and interest rates the Federal Reserve can
influence the economy.
• Perspectives-There are debates about the role that the government plays in the economy.
– Keynesians-Believe the government can stimulate the economy through fiscal policies such as increasing spending.
– Monetarists-Believe the Federal government should play a lesser role in the economy and argues that the federal reserve should
concentrate on regulating the supply of money in terms of the overall rate of economic growth.
• Federal fiscal policy- policy formulated by Congress and the President
– Spending levels-the government must consider spending in creating and maintaining policy
– Spending priorities-governments have to place priorities on national defense, human resources, and physical resources when
– Taxation-the government must have a stream of revenue to spend money and thus collects taxes from its citizens
– The tax system-Federal government collects payroll and income taxes
– Budget deficits-difference between annual government spending and revenue
– The national debt-amount of money owed by Federal government
• Subsidizing business-the Federal government also helps encourage the development of certain economic activities
– Public ownership-government ownership of industry
– Tax incentives-lower or reduced taxes for undertaking certain activities
– Loan guarantees-help troubled corporations such as the auto industry
– Cash subsidies-cash stipend for troubled economic actor
• Regulation-the Federal government also issues and enforces rules that private business must follow. The amount of government
regulation has increased over time.
– Explanations-there are debates for the increase in regulation some argue that it is a response to democratic politics while
others argue that powerful businesses seek government help in the face of competition.
• Progressive era –The beginning of government regulation in response to the growth of monopolies
• New Deal era-Regulation of banking and securities industry
• New social regulation-increase in regulation with broad public participation
• Deregulation-reduction in regulation following decline in US economy in the 1970s
– The future-the recent economic collapse will most likely lead to an increase in regulation
• Who influences economic policy? Both societal and governmental actors influence the economy
– Governmental actors
• The President-presidents often take the blame and praise for economic performance
• Congress-approves budget which dictates the spending and tax rates of the US government
• The Federal Reserve Board-formulates monetary policy for the country
– Societal actors
• Interest groups-lobby Congress for favorable treatment from government
• Public opinion-public influences elected representatives economic policy
• Political parties-each party follows a specific philosophy on economic policy